COVID-19 and Investment Treaty Claims: Challenge or Opportunity for ISDS Reform?

Dr Lu Wang

The effects of the COVID-19 pandemic on investment arbitration are significant and still emerging. State measures to curb the spread of the virus and to mitigate domestic economic crisis, albeit for legitimate public interest and in line with the call for action by the WHO, have resulted in negative impacts on foreign investment and could potentially be challenged by investors through the investor-State dispute settlement (ISDS) proceedings under applicable investment treaties. In particular, foreign investors are likely to invoke protection standards committed by States in investment treaties for compensation including, among others, the fair and equitable treatment (FET), prohibition of expropriation without compensation, and non-discriminatory treatment.

Notwithstanding international obligations on investment protection, States generally enjoy latitude in dealing with crisis or exercising “police powers” for the protection of public health and safety, so long as the measures are taken in good faith and not arbitrary, disproportionate and discriminatory. In future COVID-19 claims, the responding State may also invoke treaty exceptions such as general exceptions and/or national security exceptions to protect State’s right to regulate in the public interest, as well as defences of necessity, distress or force majeure under customary international law to avoid liability. Whether a State measure violates any treaty obligations, nonetheless, will depend on the concreate case and ultimately be determined by tribunals. 

The risk of investment arbitrations over COVID-19 measures will intensify the existing public debates on the ISDS regime, especially the asymmetry in rights and obligations between States and investors as well as the inconsistency and uncertainty in tribunals’ interpretation of key provisions. A new wave of backlash against the ISDS system will likely emerge. While some proposals for suspending the ISDS appear plausibly appealing, it remains unclear whether they would address all concerns without creating new problems in the unprecedented crisis and be implemented collectively by the global community.

Despite challenges, the COVID-19 pandemic may provide the best opportunity for States to accelerate ISDS reforms as it has never been as urgent and indispensable as today for States to reform old investment treaties for safeguarding sufficient regulatory space in investment treaties to protect public health and other essential interests and reducing the risk of ISDS proceedings in relation to COVID-19 measures. In this regard, newer investment treaties that strike a better balance could provide options for States in ISDS reforms. Moreover, online dispute resolution has been used more frequently in international arbitration which will promote the digitalisation of ISDS proceedings for the benefit of increasing efficiency and reducing cost. Meanwhile, States will need to evaluate the ISDS reform proposals and consider their approach to ISDS in the negotiation of new treaties and the modernisation of existing treaties.

In these extraordinary times, governments have been called to act together. Although the divergence and diversity in State measures may become more prominent in the post-pandemic period, international cooperation will be of great importance to maintain the sustainable development of the global economy. In such a case, international investment treaties and the ISDS regime can be useful as important policy instruments to achieve the goals to “realise free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment” and to keep market open.